Three myths about the exchange rate of hryvnia: who predicts devaluation every autumn and why they do it

Four years ago our state fell into the abyss of global economic crisis deeper than any other country on the continent. And since it was already the third major recession of our economy and banking system in just two decades of our modern history, the “feelings” and “predictions” of new crises offer a wide field for activity. The issue feeding our economy-related “sorcerers” and “foretellers” who pull the strings playing the economic fears and ignorance of the majority of our population. Anyway, as illustrated by the most recent Cyprus crisis, which easily overthrew the fifth largest banking system of Europe with just one (!) publication in “Reuters” agency about the probability (!) of introducing of the tax on deposits – panic reflection in fear of losing own savings is not only our exclusive feature. It’s characteristic for other nations that are developed not less than we are.

Meanwhile, today Cypriots have ended up with their banking system is disrepair: half of them lost everything at all, the other half lost more than 40% of their bank savings. So they think: we should have agreed to lose those 5% (but all of us and in an equal amount) of all our deposits… Instead, we lost both money and the banks.

Nobody tries to scare us with expropriate deposit taxes. They scare us with the exchange rate. Are you afraid that the hryvnia exchange rate decreases? No, not like that: that it crashes down? Of course! It’s natural human reaction. I’m afraid of that too. But we’re not just afraid; we think we know the reason of it. We are the most thinkers of this country and we are able to analyze – we are readers of ZN.UA after all!

That’s why we have professional storytellers working with us. They have to invent real and persuasive myths for us to recognize our own phantom fears from financial crises of the years 1998, 2004 and 2008. For instance, we are standing in line to a currency exchange stand and right in front of our face the “No dollars” sign plate appears. We’re heading to the bank only to find out about the “provisional administration” and the deposit is impossible to take back. Three large-scale financial crises in the last 15 years and one deep permanent hyperinflation crisis from 1991 until 1996 – you’ll have to agree that it’s too much for us to stop thinking about. That’s why we don’t believe in anything that government says about the “improvement” and we are eager to believe in the words of the opposition claiming we are two steps from failure. There is no way we could possibly believe that our country might have zero inflation, let alone the decrease of prices! Anywhere on the globe, but not in our country. We haven’t completely forgotten the year 1993 when price tags in bakery on Khreshchatyk street changed every single day.

I am aware of the fact that this article will not persuade those whose personal experience developed the habit of always believing in the worst. The purpose of this piece is to demonstrate the three essential myths that keep you in fear and uncertainty. Moreover, every autumn they attempt to make use of those myths again. It’s because those who order the horror stories about exchange rate fluctuations know exactly HOW they would profit from it. Stability makes no benefits, everybody stays even. However, usually the acting Prime Minister and the President may earn political points on this field (if the stability is reached). But nowadays politics fail to do even that.

Well, this might be a subject for another article. Now we should talk about the myths you will be frightened with this autumn.

As I have already said, there are three of them. I’ll try to list them beginning from the most important one. And I shall try to prove using numbers that none of them is relevant this autumn.

Generally speaking, in the history of hryvnia currency it’s hard to recall periods with such calm statistics as this summer. And there are even less periods when it would be possible to swing the exchange rate of our currency this autumn for the benefit of some actors, no matter what.

Myth #1: The reserves of the National Bank are melting away

It means that for the four post-crisis years (2009 till 2013) the NBU reserves decreased from USD 26 to 22.7 billion. It would not be disastrous but they’ve reached their upper mark of USD 34.6 billion in 2010. Since then, they have decreased by almost USD 12 billion – down to 22.7 billion (see the “NBU reserves” chart).


Ukraine has no shortage of economists ready to repeat at every TV show the macroeconomics textbook phrase (“Exchange rate policy” chapter): if the central bank reserves decrease, you need to devaluate the national currency rate until the demand and supply get balanced.

This is a law that is commonly known to everyone, not only to the economists. Then why the National Bank of Ukraine doesn’t do this, despite all persistent advices from everyone? It only smirks without engaging into the discussion on this matter. My version of answer is that the central bank sees not only its balance sheet but the whole picture of market.

If a curious reader flips through a few more pages on the monetary policy textbook, he will find that in no country of the world central bank is the EXCLUSIVE organization in possession of foreign currency.

In Ukraine, as well, the currency reserves are not stored in one “warehouse”, the NBU. There also are common citizens (and shady business – Ed.), who purchased USD 8 to 13 billion in cash in currency exchange offices (total amount is about USD 40 billion) in the last 4 years (see “Currency purchase by the population” chart). There are also enterprises and banks having their own foreign currency (nostro accounts of Ukrainian banks and abroad) and have gained a dollar surplus of almost 20 billion for the same period.

Now take a pencil and calculate: “minus” 12 billion in reserves, “plus” 40 billion in purchase by the population and other 20 billion of banks’ surplus (the latter, however, are put at overseas correspondent accounts – Ed.). How many billion dollars shall we have as a result in “plus”?

So where is the ground for the devaluation?

Those who refer to the reserves and call for the devaluation of hryvnia, don’t take into account the only circumstance: usually, the National Bank by the means of interventions from the reserves satisfies the currency demand of the importers that take the money out of the country. Meanwhile, we manage to maintain (along with the negative trade balance) a positive payment balance for the whole period described, i.e. the currency arrives to the country. You can see it in almost every chart in this article.

Please pay attention, for example, to the chart called “Net demand for currency and purchase thereof by citizens”. It displays more clearly than any other that almost all of the currency that is sold by National Bank of Ukraine from the reserves actually doesn’t leave the country but rather is simply bought off by the people as a means of saving. In fact, after real estate and land prices crisis collapse, and taking into account the virtual absence of securities market, our people have no other options left for keeping their savings except for one hundred dollar bills in cash and bank deposits.

However, this is a completely different issue that had nothing to do with strength of UAH currency. Instead, it’s vice versa! Notice this: during the last four years only, our citizens have bought away USD 40 billion in cash and keep it in hand. The previous amount of those dollars is unknown even to the National Bank itself, I’m afraid.

I sometimes think to myself: what if the National Bank got fed up with all these talks about loss of value and strengthened the hryvnia by 5%, then how would have it dealt with this avalanche of billions of dollars in cash when the citizens went running to exchange those at local stands for the more expensive national currency? In addition to all of this, the latter can also be deposited beneficially.

Myth #2: We are drowning in the sea of internal and external debt payments

I’m not sure whether all our readers can name the amount of the state external debt burden of our country in the pre-crisis year of 2008. In the meantime, this was almost a matter of national pride of the financial authorities. We had one of the best external debt to GDP ratios – not even on European scale, but in the world in general: it was about 10% of GDP. At the same time, the so-called Maastricht criteria for European zone states are known to allow a debt burden of up to 60% of GDP amount for member countries.

I would remember what happened to our misfortunate economy and to all of us in the last quarter of the year 2008, when the world financial crisis thundered upon. I shall only remind you that after the country “lost one third of its industrial output and a quarter of budget income” during 2009 only (according to a famous sharp and succinct Viktor Pynzenyk’s letter to Timoshenko), when no pre-elections budget program was cut and the Ministry of finance kept compensating the 25%-large revenue deficit by external loans, Ukraine’s external state debt tripled over a year. It continued to grow by inertia during Azarov’s years in office (2010-2012) and moved from 30 to 45% of GDP, until it eventually dropped to 41,5%.

Of course it didn’t plummet dramatically, but it doesn’t grow sharpening the alarming symptoms when autumn looms, on the contrary.

“Okay, this is the external debt, what about the internal one?” – non-believers might ask.

With the worst scenario, the government’s per cent payments will not exceed UAH 18 billion, i.e. UAH 3.6 billion per month in average during the remaining five months. You understand yourself that it’s not a critical value, taking into account the average monthly revenues into the general state budget fund of UAH 23.8 billion.

Come on, admit it, would you feel bankrupt if you had to pay UAH 3600 monthly as TV loan while you earn UAH 23800 per month?

Myth #3: The citizens do not have trust in the hryvnia and keeps even the deposits in foreign currency

I will mention this very briefly. The population had increased the deposits in commercial banks by a general amount of UAH 44.7 billion since the beginning of 2013. Direct UAH surplus of these deposits reached UAH 44.3 billion in national currency and less than UAH 0.5 billion in foreign currencies. I realize that this doesn’t sound modest but 98.4% of our citizens prior to the newspaper hysteria continue to build up their deposits in UAH and only 1.6% did the same for foreign currencies (see the “Deposits of individuals” chart).


So what happens in autumn?

Only time can answer this question. Any economy is inherently turbulent by definition, and of course, ours is too: it’s post-crisis and under-reformed in lots of spheres.

I just wanted to show you that these risks are significantly lower than those of the last year, and of course, much lower that they were two or three years ago when, as you can remember, no currency crashes happened at all!



Does this mean that our unrecovered economy can still be swept off its feet with a targeted attack? Yes, it’s true. It would be foolish to deny that.

This year sees even more people ready to add fuel to the flames, hoping that the fire runs high!

Aside from the classic speculative banks and panicking exporters who will keep their incomes in September and October with a slight hope of that the exchange rate grows a little bit during the autumn and allows them make some money. Also, our ever-friendly Northern neighbor has a hand in this. Its pressurizing methods can come in weirdly unfriendly shapes, as the last week’s attempt of unspoken export blockade illustrated. One should not forget that two out of the country’s largest financial agencies are fully affiliated with the large Russian banks.

The opposition also leaves one wishing for the best as well. The current one is no different from the previous one that has already become the power. Even the newbies in financial journalism can remember how they shamelessly fanned the flames around the National Bank at the first symptoms of the crisis in 2008, hoping this would destroy Yulia as a prime minister.

The current opposition cynically can turn the same weapon exactly against them, hoping in vain that it would “save” Yulia.

However, none of the parties will succeed in its dirty business of destabilizing our national currency, if, out of silliness or greed, at least some of the influential mass media don’t support them.

Even Soros would have never brought down the British pound without the help of the British press, either voluntary or not. However, we don’t seem to have even started this lesson. After all, we are a young state: we still have the luxurious right to make mistakes. Even giving ourselves an additional autumn crisis to top the ones planned by the general theory of economic cycles. Or not?




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